U.S. Securities and Exchange Commission - Open Meeting
August 28, 1996
Opening Statement of Chairman Levitt
The rules we will vote on today are among the most significant ever
to be considered by the Commission. Over the past eleven months, as
the proposals were subject to public comment, we have heard from
supporters and detractors alike that these rules will fundamentally
change practices in the securities industry -- we agree. That is
our goal.
Twenty years ago, Congress called for national market system
securities to be traded in a system unified by transparency and a
common standard for handling customer orders that would meet
investors' expectations. Congress believed then, as we do today,
that fair and vigorous competition makes the best markets; that
investors should be able to rely on published quotations for an
accurate picture of the market; and that investors should not have
to compete with their brokers for quality executions.
Over the past several years, concerns have been raised about retail
order handling practices that may diminish competition based on
price and which prevent published prices from adequately reflecting
true trading interest. These practices raise concerns about whether
customers have been receiving best execution of their orders.
In the context of the recent enforcement action against the NASD,
the Commission publicly detailed behavior in our markets which
raises these concerns even more pointedly. The Commission's Report
of Investigation made clear that institutional as well as
individual investors have traded at prices less favorable than they
were entitled to as a result of this behavior. Vigorous
competition among multiple dealers was long thought to protect
investors from the kind of overreaching which is possible when your
agent is also acting as principal; but we found a singular lack of
competition.
Where there are few incentives for dealers to compete on price, and
few opportunities for investors to do so, the open and fair markets
we rely on are neither open nor fair. While the Commission's
action against the NASD will do much to change this behavior, the
rules we will vote on today will go even farther toward assuring
that our markets are based on competition, not coordination.
The answer, for which we believe there is substantial consensus, is
to allow investor interest to be fully reflected in the market.
This permits investors to directly compete with dealers and with
other investors on the basis of price. Our goal is simple: to let
competition do the work to foster increased fairness, efficiency,
and best execution.
The rules propose to do this in three specific ways: one, by
requiring that investor limit orders be reflected in dealer quotes;
two, by requiring that "hidden" dealer interest be publicly
displayed; and three, by requiring that trading activity in
significant proprietary systems be displayed and factored into the
national best bid and offer.
The positive results of these rules are many:
* Institutional investors will benefit from a market that clearly
shows the best price.
* Issuers will have a lower cost for raising capital.
* All market participants will be better able to compete on the
basis of price.
* Individual investors will see their orders handled with the
fairness they expect - and if they enter an order at a better
price, they will be able to see it change the public quote.
* With enhanced opportunities for investors' orders to meet, all
investors will see their access to best prices improve.
The rules we vote on today reflect changes made as a result of the
comments the Commission received. We asked the public and the
industry to tell us if there was a better way to accomplish these
goals, and in some instances, there was. Today's staff
recommendations reflect these comments and improve upon the
original proposals; in one case, the price improvement proposal,
the recommendation is for the Commission to defer action while it
assesses whether the other amendments will render this rule
unnecessary. I would like to thank the commenters for the time and
effort they devoted to helping us get this right.
We are very mindful of the concern that our actions will affect the
profitability of market making firms, and thus damage the market.
We are mindful that these rules will change the culture of the
dealer market. The changes we have made to the original proposals
are our best judgement as to how to minimize this.
But we must not forget that the true strength of our markets is
investors. It is investors who provide the capital, the liquidity,
and the trust which fuel our markets. As critical to our markets
as professional dealers are, we must not forget that what is good
for investors is good for the market. These rules do not transform
the "dealer" market into an "auction" market, nor do they change
auction markets into dealer markets. They do provide a minimum
level of customer protection that is manifestly necessary now.
They are consistent with Congress' 1975 vision of a national market
system.
These rules are intended to empower all investors, by allowing
their orders to compete on a level playing field, and by providing
the disclosure they need to make informed decisions.
Long ago, in a landmark case, a court said that the fundamental
purpose of the securities laws was to substitute a philosophy of
full disclosure for the philosophy of caveat emptor. I believe that
these rules are true to that purpose, and true to that philosophy.
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